Did slavery make economic sense?

This is a question asked at the Economist's blog Free Exchange. The profitability, or otherwise, of slavery is one of the most enduring and controversial questions in economic history. At the Free Exchange they write,

Intuitively, a business that uses slaves should be profitable. You pay your workers nothing, and reap the benefits of their labour. And some economic historians try to show just how lucrative it was.

Against this is the obvious principal-agent problem, slaves don't want to work that hard. As Adam Smith put it,

The experience of all ages and nations, I believe, demonstrates that the work done by slaves, though it appears to cost only their maintenance, is in the end the dearest of any. A person who can acquire no property can have no other interest but to eat as much and to labor as little as possible.

The Economist notes,

John Elliott Cairnes [1823 - 1875], an economist, reckoned that slavery stifled economic growth in the South [of the U.S.]. Cairnes argued that reluctant workers depleted soils more quickly. In addition, scientific agriculture was impossible. Reluctant slaves, with little interest in learning, had no interest in using new farming techniques. And this meant that Southern farms lost competitiveness to their Northern counterparts.

The Economist goes on,

Robert Fogel and Stanley Engerman made the most famous contribution to the debate. Their book, Time on the Cross, suggested that slavery in the American South was a lucrative enterprise for plantation owners. The authors reckoned that slaves were treated pretty well. And this meant that they were productive. So for the owners, slavery was:

generally a highly profitable investment which yielded rates of return that compared favourably with the most outstanding investment opportunities in manufacturing

Another study, by Alfred Conrad and John Meyer, calculated the rate of return on investing in slaves. They reckoned that “slave capital” earned at least equal returns to those from other forms of capital investment—such as railroad bonds. The rate of return on slaves could be as high as 13%—compared to a yield of 6-8% on the railroads.

So an organisational framework had to be developed to overcome the principal-agent problems. The plantation was that framework. Within slave plantations, the labour system was organised tor the purpose of maximising worker productivity while minimising disruptions of work operations and loss of property. Two major types of work systems were utilised to achieve this: the task system which was organised around the assignment of slaves by the driver (supervisor) to specific work tasks, usually related to crop production; and the gang system in which work was organised around tasks that required work performed by such groups as ploughmen, hoe-hands, and fence-repairers.

Individual plantation owners may have done well out of slavery but the effect of slavery on the wider economic development of the South is also important. Not only may have Southern farms lost competitiveness to their Northern counterparts but,

Others reckon that slavery made it difficult for the South to establish trading networks. According to Ralph Anderson and Robert Gallman, slavery forced planters to diversify their economic activities. The costs of owning a slave—such as food and shelter—were pretty constant. And so if plantations specialised in a certain crop, they left themselves open to sudden drops in income and consequently big losses. But by pursuing a range of economic activities, they had a steadier revenue flow to match their fixed costs.

Diversification posed problems. Messrs Anderson and Gallman argue that it inhibited trade within the South—and, consequently, the development of towns and villages. Slaveowners found it easier to produce something themselves, rather than buy it. And the South found it difficult to develop a manufacturing industry—instead, it depended on imports from the North. As a result, economic growth was stifled.

Slavery hindered the development of Southern capitalism in other ways. Eugene Genovese, writing in 1961, reckoned that the antebellum South was not profit-seeking. In fact, slavery was not even meant to be profitable. Slaveowners were keener on flaunting their vast plantations and huge reserves of slaves than they were about profits and investment. Rational economic decisions were sacrificed for pomp and circumstance.

The Economist ends by saying,

Of course any account of the economic effect of slavery should note the effect of treating human beings as capital equipment. The direct impact on the utility of the slaves themselves of this condition represented a terrible economic cost. And there was also an opportunity cost to the broader economy, which lost out on the potential human capital and entrepreneurial contributions slaves might have made as free workers. Abolition of involuntary servitude to say nothing of chattel slavery, was clearly a moral imperative. We can also feel pretty safe concluding that, whatever the benefit of the system to slave-owners, its abolition made as much economic sense as anything can.